Note: (The information in this note was provided by the Indiana House of Representatives Ways and Means Republican Staff Fiscal Analyst on November 17, 2006, and updates the delayed payments portion of the "Slay The Two-Headed Tax Increase Dragon" presentation below.) School corporations and local governments budget on a calendar year cycle, while state appropriations are made on a fiscal year cycle (July - June). This difference in budget cycles allows the State to shift a payment from one of its budget years to the next while continuing to make 12 payments within the same budget year for school corporations and local governments. Therefore, the school corporations and local governments were never shorted funds within their budget cycle. As of July 21, 2006, the payment delay for school corporations no longer existed. University budgets are on the State fiscal year cycle (July-June). Since the state government and state universities share the same budget cycle, a payment delay that shifts State spending from one budget year to the next also reduces state university revenues in the year of the payment delay. Here are the numbers for the end of the last fiscal and the end of the current fiscal year.

6/30/2006 (actual): Universities $102M, K-12 Schools $160M, Local Government $360M, TOTAL $622M.

6/30/2007 (estimate): Universities $62M, K-12 Schools $0, Local Government $223M, TOTAL $285M.

The pressures for tax increases during the 2005 session of the Indiana General Assembly will come from two sources: (1) the state's accumulated "delayed payments" and (2) the state's "structural deficit." Our elected public servants - State Representatives and State Senators with the guidance of the Governor - must exercise the political will necessary to slay this two-headed tax increase dragon.

As of November 2004, the state was carrying a liability in the $722 million to $750 million range as delayed payments. This liability came about when the June 1, 2002, payments to universities, public schools, and local governments were delayed by the General Assembly until December 31, 2002. In other words, the June 2002 payments were not made and two payments were made in December 2002. The January 2003 payments were then skipped so only twelve monthly payments would be made for the 2003 fiscal year that ended June 30, 2003. The practice of skipping the January payments and making two December payments (December 1 and December 31) continues. These delayed payments served only one purpose - they were an accounting maneuver to reduce the amount of money shown as being spent by the state during the 2001-02 fiscal year.

Because the skipped January payments increase each year, the cost increases each year of returning to the normal payment schedule where one payment is made the first of each month. The November 2004 cost of the skipped January payments was about $100 million for universities, $320 million for public schools, and $302 million to $330 million for local governments.

The $100 million in delayed university payments has already been absorbed through spending cuts. The universities have the same July through June fiscal year as the state, and only eleven fiscal year payments were made to the universities when the June 2002 payment was delayed. Because of the uncertainty as to when the state will return to making January payments, no responsible university president should have the delayed payment included in a university's operating budget. Therefore, our Governor and General Assembly public servants should exercise the political will necessary to legally change the university payment delays into what they really are - spending cuts. Removing the $100 million in delayed university payments as a liability might improve the state's bond rating and will remove a false justification for tax increases.

Unlike the $100 million in delayed university payments, the $320 million in delayed public school payments and the $302 million to $330 million in delayed local government payments have not already been absorbed as spending cuts. Because the public schools and local governments operate on a calendar year, they have never missed twelve payments within a calendar year's time as a result of the June 2002 payment delay and the subsequent skipping of January payments. When the state returns to a normal schedule of one payment each month, there will be one calendar year where public schools and local governments will receive only eleven payments instead of the accustomed twelve.

The current public schools payment schedule of no January payment and two December payments does cause a slight increase in local property taxes. Most Indiana school corporations borrow money early in the calendar year to maintain cash flow until the summer local property tax payment is received. The absence of a January payment increases the amount borrowed. Assuming the full delayed payment amount of $320 million is borrowed by Indiana's 323 school corporations from the Indiana Bond Bank at 1.45% interest, the state's local property tax payers have $4.64 million in interest added to their property tax burden. This means that the average local property tax payer has about 0.0024 added to their property tax rate. In reality, this 0.0024 increase in the local property tax rate is not likely to go away when the state returns to a normal schedule of one payment each month.

Because local governments do not use short-term borrowing to meet cash flow needs, the current payment schedule of no January payment and two December payments does not result in local tax increases by local governments.

The delayed public school and local government payments must not be used as a justification for tax increases. The current public schools and local governments payment schedule of no January payment and two December payments should continue until economy improvements increase tax revenues enough to provide a Rainy Day Fund balance sufficient to return to the normal monthly payments. If state spending is properly constrained, there may be a large enough Rainy Day Fund balance without tax increases to pay for a return to monthly payments as early as 2008. Remember, the annual budgets of public schools and local governments have NOT been reduced by the payment delays; the only reason to reverse the payment delays is so this accounting maneuver can be used again when government revenues decline.

Have you read enough newspaper articles referring to "the state's nearly $800 million deficit" that you have decided it must be true? Don't believe it. The state's "structural deficit" is really no more than $390.3 million. The structural deficit is basically the difference between two figures - recurring base expenditures and recurring base revenues.

The fiction that there is an $800 million state deficit came from opposing General Assembly factions during the 2004 election. One faction wanted the public to believe there is an $800 million deficit to support tax increases. The other faction used the supposed $800 million deficit to make a case that the state has been mismanaged. The data listed next compares the actual structural deficit of no more than $390.3 million to the alleged structural deficit of $796.3 million.

A. CHANGE IN RESERVE BALANCE
Alleged: $195.7 million
Actual: $0
Explanation: The state's cash reserve was budgeted to decrease from $532.8 million in the 2004 fiscal year to $337.1 million in the 2005 fiscal year. However, the December 14, 2004, revenue forecast by the State Budget Agency now calls for the state to have a $643.0 million cash reserve at the close of the 2005 fiscal year.

B. NON-RECURRING REVENUES
(1) Abandoned Property Fund Transfer
Alleged: $25.0 million
Actual: $25.0 million
Explanation: If the balance in the Abandoned Property Fund exceeds $500,000, the excess is supposed to be transferred to the Common School Fund for loans to local school corporations for projects such as school building construction and educational technology programs.
(2) County Governments Past Due Juvenile Incarceration Payments
Alleged: $54.0 million
Actual: $54.0 million
Explanation: Some counties owe $54.0 million to the state (more than 80% is owed by Marion County) for the incarceration of juvenile offenders. It is uncertain if the state will be paid the money it is owed in the 2005 fiscal year as budgeted.
(3) Other Fund Transfers
Alleged: $4.9 million
Actual: $4.9 million
Explanation: Money will not be available after the 2005 fiscal year for transfer from the Administrative Services Revolving Fund and the Prison Industries Fund.
(4) Riverboat License Transfer Fee
Alleged: $2.0 million
Actual: $2.0 million
Explanation: Riverboat licenses are not transferred very often.

D. NON-RECURRING REVERSIONS
(1) State Facility Capital Expenditures
Alleged: $143.4 million
Actual: $143.4 million
Explanation: The authorization of past appropriations from prior bienniums for state facility capital projects was allowed to lapse and $143.4 million was returned to the state's cash reserve. There is some question as to whether similar reversions of state facility capital expenditures can be reasonably expected during the next biennium. NOTE: There is a point of view that only "necessary" state facility repair projects should be undertaken the next biennium, and that remodeling and new construction projects should be postponed until the state's revenues improve. This would result in an actual structural deficit assigned to state facility capital expenditure reversions that is considerably less than $143.4 million.
(2) State University Capital Expenditures
Alleged: $87.9 million
Actual: $0
Explanation: The authorization of past appropriations from prior bienniums for state university capital projects was allowed to lapse and $87.9 million was returned to the state's cash reserve. The General Assembly had approved $280 million for 2003-05 state university capital projects. This $280 million, which increased 70% from 1995-97, was more than twice the total recommended by the Indiana Commission for Higher Education. Therefore, similar reversions of state university capital expenditures can be supported for the next biennium. Limiting state university capital expenditures would also control bond payments growth as a percent of total university funds.
(3) Operating Reversions
Alleged: $45.0 million
Actual: $0
Explanation: These modest spending cuts in department operating budgets for the 2005 fiscal year should be permanent and not restored in future budgets.

F. UNIVERSITY REPAIR AND REHABILITATION UNDERFUNDED
Alleged: $38.4 million
Actual: $38.4 million
Explanation: The "underfunded" amount of $38.4 million was arrived at by assuming that adequate funding for repair and rehabilitation of academic buildings at state universities is 100% of the Commission for Higher Education formula. The ongoing college building boom increases maintenance-related expenses.

G. PUBLIC HEALTH SPENDING SHIFT
Alleged: $56.7 million
Actual: $0
Explanation: DD Client Services, DDARS Direct Care Worker Salaries, and numerous other public health expenditures were shifted to the Tobacco Master Settlement Agreement (TMSA) Fund. TMSA Fund revenues can sustain current TMSA spending levels, including the shifts, beyond 2010.

J. TEACHER PENSION PAYMENTS SHIFT
Alleged: $190.0 million
Actual: $190.0 million
Explanation: A total of $190 million in 2005 fiscal year teacher pension payments was shifted to the Pension Stabilization Fund. This shift must not be repeated because all monies in the Pension Stabilization Fund are needed to help offset the projected $8.5 billion shortfall in teacher retirement funds.

K. ADDBACKS (reduce the structural deficit $89.1 million)
(1) Property Tax Replacement Credits
Alleged: ($43.7 million)
Actual: ($43.7 million)
Explanation: The state's cost for property tax replacement credits in the 2005 fiscal year is artificially high because some Pay 2003 credits are included due to the fact that some counties were extremely slow in completing reassessment and issuing Pay 2003 property tax bills.
(2) Homestead Credits
Alleged: ($4.4 million)
Actual: ($4.4 million)
Explanation: Homestead Credit filing was extended from the normal May 10 deadline until December 15 in 2003, allowing more new homeowners to qualify in Pay 2004 (which covers the first 6 months of the 2005 fiscal year). Without this deadline extension, these homeowners would have had to wait until Pay 2005 to begin receiving the Homestead Credit; thus it was an unusual/non-recurring/one-time cost in the 2005 fiscal year.
(3) Build Indiana Fund Transfer
Alleged: (41.0 million)
Actual: (41.0 million)
Explanation: The State Budget Agency continues to estimate the 2005 fiscal year Build Indiana Fund transfer at $147.5 million even though the actual 2004 fiscal year transfer was only $106.5 million.

The 2005-07 Taxpayer Friendly Budget proposed by Watchdog Indiana demonstrates that there are many ways to balance the next biennium's state budget without tax increases. All it takes is the political will to do so. The first step in exercising the needed political will is to properly understand the state's structural deficit.